Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business of Organization
Armada Hoffler Properties, Inc. (the "Company") is a full-service real estate company with extensive experience developing, building, owning, and managing high-quality, institutional-grade office, retail, and multifamily properties in attractive markets primarily throughout the Mid-Atlantic and Southeastern United States.
The Company is a real estate investment trust ("REIT"), the sole general partner of Armada Hoffler, L.P. (the "Operating Partnership") and, as of June 30, 2020, owned 72.8% of the economic interest in the Operating Partnership, of which 0.1% is held as general partnership units. The operations of the Company are carried on primarily through the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership.
As of June 30, 2020, the Company's property portfolio consisted of 51 operating properties and three properties either under development or not yet stabilized.
Refer to Note 5 for information related to the Company's recent acquisitions and dispositions of properties.
2. Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP").
The condensed consolidated financial statements include the financial position and results of operations of the Company and its consolidated subsidiaries, including the Operating Partnership, its wholly-owned subsidiaries, and any interests in variable interest entities ("VIEs") where the Company has been determined to be the primary beneficiary. All significant intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.
The accompanying condensed consolidated financial statements were prepared in accordance with the requirements for interim financial information. Accordingly, these interim financial statements have not been audited and exclude certain disclosures required for annual financial statements. Also, the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year, particularly in light of the novel coronavirus ("COVID-19") pandemic and its effects on the domestic and global economies. The pandemic has led governments and other authorities around the world, including federal, state, and local authorities in the United States, to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines, and shelter-in-place orders, causing many of the Company’s tenants, particularly in the Company’s retail portfolio, to suspend or limit operations for certain periods of time. We expect to continue to experience effects on our business as the impacts from COVID-19 and the related responses continue to develop. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed. Such estimates are based on management’s historical experience and best judgment after considering past, current, and expected events and economic conditions. Actual results could differ significantly from management’s estimates.
Reclassifications
Certain items have been reclassified from their prior year classifications to conform to the current year presentation. These reclassifications had no effect on net income or stockholders' equity as previously reported.
Recent Accounting Pronouncements
Accounting Standards Adopted in 2020
Credit losses
In June 2016, the Financial Accounting Standard Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the "incurred loss" approach under previous guidance with an "expected loss" model for instruments measured at amortized cost, such as the Company's notes receivable, construction receivables, and off-balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses.
The Company adopted the new standard on January 1, 2020, using the modified retrospective transition method and recorded a noncash cumulative effect adjustment to record a reduction to retained earnings of $3.0 million, $2.8 million of which relates to the Company's mezzanine loans and $0.2 million of which relates to the Company's construction accounts receivable. See Note 6—Notes Receivable and Current Expected Credit Losses, for more information.
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). The ASU is part of the FASB's disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles. The ASU modifies disclosure requirements on fair value measurements in Topic 820. The Company adopted the new standard on January 1, 2020. The adoption of the ASU did not have a material impact on disclosures in the Company's consolidated financial statements.
Lease Modification Accounting Q&A
In April 2020, the FASB staff issued a question and answer document (the "Lease Modification Q&A") focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows lessors, if certain criteria have been met, to bypass the lease by lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company adopted this guidance during the three months ended June 30, 2020 and elected to not apply the existing lease modification accounting framework in instances where the total payments under a modified lease are substantially the same as or less than the total payments under the existing lease.
Other Accounting Policies
See the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a description of other accounting principles upon which basis the accompanying consolidated financial statements were prepared.
3. Segments
Net operating income (segment revenues minus segment expenses) is the measure used by the Company’s chief operating decision-maker to assess segment performance. Net operating income is not a measure of operating income or cash flows from operating activities as measured by GAAP and is not indicative of cash available to fund cash needs. As a result, net operating income should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate net operating income in the same manner. The Company considers net operating income to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of the Company’s real estate and construction businesses.
Net operating income of the Company’s reportable segments for the three and six months ended June 30, 2020 and 2019 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Office real estate
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
10,494
|
|
|
$
|
7,382
|
|
|
$
|
20,686
|
|
|
$
|
12,938
|
|
Rental expenses
|
|
2,291
|
|
|
1,853
|
|
|
4,837
|
|
|
3,339
|
|
Real estate taxes
|
|
1,228
|
|
|
653
|
|
|
2,374
|
|
|
1,179
|
|
Segment net operating income
|
|
6,975
|
|
|
4,876
|
|
|
13,475
|
|
|
8,420
|
|
Retail real estate
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
18,714
|
|
|
19,235
|
|
|
39,125
|
|
|
36,492
|
|
Rental expenses
|
|
2,458
|
|
|
2,860
|
|
|
5,478
|
|
|
5,460
|
|
Real estate taxes
|
|
2,007
|
|
|
1,893
|
|
|
4,173
|
|
|
3,704
|
|
Segment net operating income
|
|
14,249
|
|
|
14,482
|
|
|
29,474
|
|
|
27,328
|
|
Multifamily residential real estate
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
10,707
|
|
|
9,761
|
|
|
22,393
|
|
|
17,857
|
|
Rental expenses
|
|
3,560
|
|
|
3,202
|
|
|
7,369
|
|
|
5,841
|
|
Real estate taxes
|
|
998
|
|
|
905
|
|
|
2,019
|
|
|
1,696
|
|
Segment net operating income
|
|
6,149
|
|
|
5,654
|
|
|
13,005
|
|
|
10,320
|
|
General contracting and real estate services
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
57,398
|
|
|
21,444
|
|
|
104,666
|
|
|
38,480
|
|
Segment expenses
|
|
55,342
|
|
|
20,123
|
|
|
100,892
|
|
|
36,409
|
|
Segment gross profit
|
|
2,056
|
|
|
1,321
|
|
|
3,774
|
|
|
2,071
|
|
Net operating income
|
|
$
|
29,429
|
|
|
$
|
26,333
|
|
|
$
|
59,728
|
|
|
$
|
48,139
|
|
Rental expenses represent costs directly associated with the operation and management of the Company’s real estate properties. Rental expenses include asset management expenses, property management fees, repairs and maintenance, insurance, and utilities.
General contracting and real estate services revenues for the three months ended June 30, 2020 and 2019 exclude revenue related to intercompany construction contracts of $8.4 million and $30.0 million, respectively, as it is eliminated in consolidation. General contracting and real estate services revenues for the six months ended June 30, 2020 and 2019 exclude revenue related to intercompany construction contracts of $21.5 million and $60.2 million, respectively.
General contracting and real estate services expenses for the three months ended June 30, 2020 and 2019 exclude expenses related to intercompany construction contracts of $8.3 million and $29.7 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 2020 and 2019 exclude expenses related to intercompany construction contracts of $21.3 million and $59.6 million, respectively.
The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three and six months ended June 30, 2020 and 2019 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net operating income
|
|
$
|
29,429
|
|
|
$
|
26,333
|
|
|
$
|
59,728
|
|
|
$
|
48,139
|
|
Depreciation and amortization
|
|
(13,777
|
)
|
|
(13,505
|
)
|
|
(28,056
|
)
|
|
(23,409
|
)
|
Amortization of right-of-use assets - finance leases
|
|
(146
|
)
|
|
(85
|
)
|
|
(293
|
)
|
|
(85
|
)
|
General and administrative expenses
|
|
(2,988
|
)
|
|
(2,951
|
)
|
|
(6,781
|
)
|
|
(6,352
|
)
|
Acquisition, development and other pursuit costs
|
|
(502
|
)
|
|
(57
|
)
|
|
(529
|
)
|
|
(457
|
)
|
Impairment charges
|
|
—
|
|
|
—
|
|
|
(158
|
)
|
|
—
|
|
Gain on real estate dispositions
|
|
2,776
|
|
|
—
|
|
|
2,776
|
|
|
—
|
|
Interest income
|
|
4,412
|
|
|
5,593
|
|
|
11,638
|
|
|
10,912
|
|
Interest expense on indebtedness
|
|
(6,999
|
)
|
|
(7,491
|
)
|
|
(14,958
|
)
|
|
(13,377
|
)
|
Interest expense on finance leases
|
|
(228
|
)
|
|
(112
|
)
|
|
(457
|
)
|
|
(112
|
)
|
Equity in income of unconsolidated real estate entities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
273
|
|
Change in fair value of interest rate derivatives
|
|
(6
|
)
|
|
(1,933
|
)
|
|
(1,742
|
)
|
|
(3,396
|
)
|
Unrealized credit loss release (provision)
|
|
117
|
|
|
—
|
|
|
(260
|
)
|
|
—
|
|
Other income (expense), net
|
|
286
|
|
|
4
|
|
|
344
|
|
|
64
|
|
Income tax benefit (provision)
|
|
(65
|
)
|
|
30
|
|
|
192
|
|
|
140
|
|
Net income
|
|
$
|
12,309
|
|
|
$
|
5,826
|
|
|
$
|
21,444
|
|
|
$
|
12,340
|
|
General and administrative expenses represent costs not directly associated with the operation and management of the Company’s real estate properties and general contracting and real estate services businesses, including corporate office personnel salaries and benefits, bank fees, accounting fees, legal fees, and other corporate office expenses.
4. Leases
Lessee Disclosures
As a lessee, the Company has eight ground leases on seven properties with initial terms that range from 5 to 65 years and options to extend up to an additional 70 years in certain cases. The exercise of lease renewal options is at the Company's sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Six of these leases have been classified as operating leases and two of these leases have been classified as finance leases. The Company's lease agreements do not contain any residual value guarantees or material restrictive covenants.
Lessor Disclosures
As a lessor, the Company leases its properties under operating leases and recognizes base rents on a straight-line basis over the lease term. The Company also recognizes revenue from tenant recoveries, through which tenants reimburse the Company on an accrual basis for certain expenses such as utilities, janitorial services, repairs and maintenance, security and alarms, parking lot and ground maintenance, administrative services, management fees, insurance, and real estate taxes. Rental revenues are reduced by the amount of any leasing incentives amortized on a straight-line basis over the term of the applicable lease. In addition, the Company recognizes contingent rental revenue (e.g., percentage rents based on tenant sales thresholds) when the sales thresholds are met. Many tenant leases include one or more options to renew, with renewal terms that can extend the lease term from one to 15 years or more. The exercise of lease renewal options is at the tenant's sole discretion. The Company includes a renewal period in the lease term only if it appears at lease inception that the renewal is reasonably assured.
Rental revenue for the three and six months ended June 30, 2020 and 2019 comprised the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Base rent and tenant charges
|
|
$
|
38,767
|
|
|
$
|
35,066
|
|
|
$
|
80,280
|
|
|
$
|
64,991
|
|
Accrued straight-line rental adjustment
|
|
953
|
|
|
1,187
|
|
|
1,510
|
|
|
2,148
|
|
Lease incentive amortization
|
|
(160
|
)
|
|
(184
|
)
|
|
(333
|
)
|
|
(368
|
)
|
Above/below market lease amortization
|
|
355
|
|
|
309
|
|
|
747
|
|
|
516
|
|
Total rental revenue
|
|
$
|
39,915
|
|
|
$
|
36,378
|
|
|
$
|
82,204
|
|
|
$
|
67,287
|
|
5. Real Estate Investment
Property Acquisitions
On January 10, 2020, the Company entered into an operating agreement with a partner to develop a mixed-use property in Charlotte, North Carolina. The Company has an 80% interest in 10th and Tryon Partners, LLC (the "Tryon Partnership"). On January 10, 2020, the Tryon Partnership purchased land for a purchase price of $6.3 million for this project. The Company is responsible for funding the equity requirements of this development, including the $6.3 million purchase of the land. Management has concluded that this entity is a VIE as it lacks sufficient equity to fund its operations without additional financial support. The Company is the developer of the project and has the power to direct the activities of the project that most significantly impact its performance and is the party most closely associated with the project. Therefore, the Company is the project's primary beneficiary and consolidates the Tryon Partnership in its consolidated financial statements.
On September 12, 2019, the Company entered into an operating agreement with a partner to develop a mixed-use property in Belmont, North Carolina. The Company has an 85% interest in Chronicle Holdings, LLC (the "Chronicle Partnership"). On March 20, 2020, the Chronicle Partnership purchased land for a purchase price of $2.3 million for this project. The Company is responsible for funding the equity requirements of this development, including the $2.3 million purchase of the land. Management has concluded that this entity is a VIE as it lacks sufficient equity to fund its operations without additional financial support. The Company is the developer of the project and has the power to direct the activities of the project that most significantly impact its performance and is the party most closely associated with the project. Therefore, the Company is the project's primary beneficiary and consolidates the Chronicle Partnership in its consolidated financial statements.
In June 2020, the Company exercised its option to purchase the remaining 21% ownership interest in 1405 Point in exchange for increased ground lease payments to be made over the approximately 42-year remaining lease term. The Company recorded a note payable of $6.1 million, which represents the present value of these payments. The ground lessor is an affiliate of our former joint venture partner.
Property Disposition
On May 29, 2020, the Company sold a portfolio of seven retail properties for $90.0 million. The portfolio consists of Alexander Pointe, Bermuda Crossroads, Gainsborough Square, Harper Hill Commons, Indian Lakes Crossing, Renaissance Square, and Stone House Square. The gain on sale was $2.8 million. In connection with the sale of this portfolio, the Company repaid $61.9 million on the revolving credit facility, resulting in net proceeds of $25.9 million.
The Company has designated proceeds from the sale of Alexander Pointe, Bermuda Crossroads, and Gainsborough Square as part of a like-kind exchange for tax purposes. The Company plans to use these proceeds for its purchase of Nexton Square in the third or fourth quarter of 2020. In the event that all or some of these proceeds are not used for the purchase of Nexton Square or another suitable acquisition, the Company may be subject to tax indemnification payments under the terms of the Company's tax protection agreements with certain limited partners in the Operating Partnership.
6. Notes Receivable and Current Expected Credit Losses
Notes Receivable
The Company had the following notes receivable outstanding as of June 30, 2020 and December 31, 2019 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding loan amount
|
|
|
|
|
|
Interest compounding
|
Development Project
|
|
June 30,
2020
|
|
December 31,
2019
|
|
Maximum loan commitment
|
|
Interest rate
|
The Residences at Annapolis Junction
|
|
$
|
42,767
|
|
|
$
|
40,049
|
|
|
$
|
48,105
|
|
|
10.0
|
%
|
(a)
|
Monthly
|
Delray Plaza
|
|
15,484
|
|
|
12,995
|
|
|
17,000
|
|
|
15.0
|
%
|
(a)(b)
|
Annually
|
Nexton Square
|
|
16,309
|
|
|
15,097
|
|
|
17,000
|
|
|
10.0
|
%
|
|
Monthly
|
Interlock Commercial
|
|
79,082
|
|
|
59,224
|
|
|
103,000
|
|
|
15.0
|
%
|
|
None
|
Solis Apartments at Interlock
|
|
27,263
|
|
|
25,588
|
|
|
41,100
|
|
|
13.0
|
%
|
|
Annually
|
Total mezzanine
|
|
180,905
|
|
|
152,953
|
|
|
$
|
226,205
|
|
|
|
|
|
Other notes receivable
|
|
14
|
|
|
1,147
|
|
|
|
|
|
|
|
Notes receivable guarantee premium
|
|
4,411
|
|
|
5,271
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
(3,085
|
)
|
|
—
|
|
|
|
|
|
|
|
Total notes receivable
|
|
$
|
182,245
|
|
|
$
|
159,371
|
|
|
|
|
|
|
|
________________________________________
(a) Loan was placed on nonaccrual status effective April 1, 2020.
(b) $2.0 million of this loan is subject to an interest rate of 6%.
Interest on the mezzanine loans is accrued and funded utilizing the interest reserves for each loan, which are components of the respective maximum loan commitments, and such accrued interest is added to the loan receivable balances. The Company recognized interest income for the three and six months ended June 30, 2020 and 2019 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Development Project
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
1405 Point
|
|
$
|
—
|
|
|
$
|
173
|
|
|
$
|
—
|
|
|
$
|
783
|
|
|
North Decatur Square
|
|
—
|
|
|
693
|
|
|
—
|
|
|
1,331
|
|
|
The Residences at Annapolis Junction
|
|
—
|
|
(a)
|
2,173
|
|
(b)
|
2,468
|
|
(a)(c)
|
4,196
|
|
(b)
|
Delray Plaza
|
|
—
|
|
(a)
|
414
|
|
|
489
|
|
(a)
|
724
|
|
|
Nexton Square
|
|
405
|
|
|
524
|
|
|
797
|
|
|
1,033
|
|
|
Interlock Commercial
|
|
3,157
|
|
(c)
|
1,086
|
|
|
6,175
|
|
(c)
|
1,830
|
|
|
Solis Apartments at Interlock
|
|
838
|
|
|
508
|
|
|
1,675
|
|
|
972
|
|
|
Total mezzanine
|
|
4,400
|
|
|
5,571
|
|
|
11,604
|
|
|
10,869
|
|
|
Other interest income
|
|
12
|
|
|
22
|
|
|
34
|
|
|
43
|
|
|
Total interest income
|
|
$
|
4,412
|
|
|
$
|
5,593
|
|
|
$
|
11,638
|
|
|
$
|
10,912
|
|
|
________________________________________
(a) Loan was placed on nonaccrual status effective April 1, 2020.
(b) Includes amortization of the $5.0 million loan modification fee paid by the borrower in November 2018.
(c) Includes partial recognition of interest income related to an exit fee that is due upon repayment of the loan.
Delray Plaza
On March 3, 2020, the Delray Plaza loan was modified to increase the maximum amount of the loan to $17.0 million, with $2.0 million of additional funds borrowed at an interest rate of 6% in order to fund final development activities. The borrower pledged 125,832 Class A Units as additional collateral for this loan.
Interlock Commercial
In May 2020, the Company modified the Interlock Commercial loan to allow for an additional $8.0 million of loan funding; this additional loan funding may be available for cost overruns as well as the building of townhome units as an additional phase of this development project. The borrower also modified the senior construction loan on the project. As part of this modification, the Company agreed to increase its payment guaranty for this senior loan to $34.3 million.
Current Expected Credit Losses
The Company is exposed to credit losses primarily through its mezzanine lending activities. As of June 30, 2020, the Company had five mezzanine loans, all of which are secured by second liens on development projects in various stages of completion or lease-up. Each of these projects is subject to a loan that is senior to the Company’s mezzanine loan. Interest on these loans is paid in kind and is generally not expected to be paid until a sale of the project after completion of the development.
The Company's management performs a quarterly analysis of the loan portfolio to determine the risk of credit loss based on the progress of development activities including leasing activities, projected development costs, and current and projected mezzanine and senior construction loan balances. The Company estimates future losses on its notes receivable using risk ratings that correspond to probabilities of default and loss given default. The Company's risk ratings are as follows:
|
|
•
|
Pass: loans in this category are adequately collateralized by a development project with conditions materially consistent with the Company's underwriting assumptions.
|
|
|
•
|
Special Mention: loans in this category show signs that the economic performance of the project may suffer as a result of slower-than-expected leasing activity or an extended development or marketing timeline. Loans in this category warrant increased monitoring by management.
|
|
|
•
|
Substandard: loans in this category may not be fully collected by the Company unless remediation actions are taken. Remediation actions may include obtaining additional collateral or assisting the borrower with asset management activities to prepare the project for sale. The Company may also consider placing the loan on nonaccrual status if it does not believe that additional interest accruals will ultimately be collected.
|
On a quarterly basis, the Company compares the risk inherent in its loans to industry loan loss data experienced during past business cycles. The Company updated the risk ratings for each of its notes receivable during the three months ended June 30, 2020. The Company obtained industry loan loss data relative to these risk ratings as of March 31, 2020.
The following table presents amortized cost basis of the portfolio by year of origination and risk rating as of June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of Origination
|
Risk Ratings
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Total
|
Pass
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,939
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,939
|
|
Special Mention
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Substandard
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,776
|
|
|
42,516
|
|
|
57,292
|
|
Total amortized cost basis
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,939
|
|
|
$
|
14,776
|
|
|
$
|
42,516
|
|
|
$
|
182,231
|
|
As of December 31, 2019, there was no allowance for loan losses. At June 30, 2020, the Company reported $182.2 million of notes receivable, net of allowances of $3.1 million. Changes in the allowance for the six months ended June 30, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
Beginning balance (December 31, 2019)
|
|
$
|
—
|
|
Cumulative effect of accounting change
|
|
2,825
|
|
Unrealized credit loss provision
|
|
260
|
|
Ending balance
|
|
$
|
3,085
|
|
The Company places loans on nonaccrual status when the loan balance, together with the balance of any senior loan, approximately equals the estimated realizable value of the underlying development project. As of December 31, 2019 and March 31, 2020, there were no loans on nonaccrual status. During the three months ended June 30, 2020, the Company placed the loans for Delray Plaza and The Residences at Annapolis Junction on nonaccrual status with total amortized cost basis of $57.3 million. As a result, there was $2.6 million of interest income not recognized during the three months ended June 30, 2020.
7. Construction Contracts
Construction contract costs and estimated earnings in excess of billings represent reimbursable costs and amounts earned under contracts in progress as of the balance sheet date. Such amounts become billable according to contract terms, which usually consider the passage of time, achievement of certain milestones, or completion of the project. The Company expects to bill and collect substantially all construction contract costs and estimated earnings in excess of billings as of June 30, 2020 during the next twelve months.
Billings in excess of construction contract costs and estimated earnings represent billings or collections on contracts made in advance of revenue recognized.
The following table summarizes the changes to the balances in the Company’s construction contract costs and estimated earnings in excess of billings account and the billings in excess of construction contract costs and estimated earnings account for the six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2019
|
|
|
Construction contract costs and estimated earnings in excess of billings
|
|
Billings in excess of construction contract costs and estimated earnings
|
|
Construction contract costs and estimated earnings in excess of billings
|
|
Billings in excess of construction contract costs and estimated earnings
|
Beginning balance
|
|
$
|
249
|
|
|
$
|
5,306
|
|
|
$
|
1,358
|
|
|
$
|
3,037
|
|
Revenue recognized that was included in the balance at the beginning of the period
|
|
—
|
|
|
(5,306
|
)
|
|
—
|
|
|
(3,037
|
)
|
Increases due to new billings, excluding amounts recognized as revenue during the period
|
|
—
|
|
|
9,320
|
|
|
—
|
|
|
2,541
|
|
Transferred to receivables
|
|
(285
|
)
|
|
—
|
|
|
(1,890
|
)
|
|
—
|
|
Construction contract costs and estimated earnings not billed during the period
|
|
333
|
|
|
—
|
|
|
461
|
|
|
—
|
|
Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion
|
|
36
|
|
|
—
|
|
|
532
|
|
|
(752
|
)
|
Ending balance
|
|
$
|
333
|
|
|
$
|
9,320
|
|
|
$
|
461
|
|
|
$
|
1,789
|
|
The Company defers pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable. Pre-contract costs of $1.0 million and $0.9 million were deferred as of June 30, 2020 and December 31, 2019, respectively. Amortization of pre-contract costs for the six months ended June 30, 2020 and 2019 was $0.4 million and $0.3 million, respectively.
Construction receivables and payables include retentions, amounts that are generally withheld until the completion of the contract or the satisfaction of certain restrictive conditions such as fulfillment guarantees. As of June 30, 2020 and December 31, 2019, construction receivables included retentions of $13.9 million and $9.0 million, respectively. The Company expects to collect substantially all construction receivables outstanding as of June 30, 2020 during the next twelve months. As of June 30, 2020 and December 31, 2019, construction payables included retentions of $17.4 million and $18.0 million, respectively. The Company expects to pay substantially all construction payables outstanding as of June 30, 2020 during the next twelve months.
The Company’s net position on uncompleted construction contracts comprised the following as of June 30, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Costs incurred on uncompleted construction contracts
|
$
|
796,457
|
|
|
$
|
695,564
|
|
Estimated earnings
|
28,275
|
|
|
24,553
|
|
Billings
|
(833,719
|
)
|
|
(725,174
|
)
|
Net position
|
$
|
(8,987
|
)
|
|
$
|
(5,057
|
)
|
|
|
|
|
Construction contract costs and estimated earnings in excess of billings
|
$
|
333
|
|
|
$
|
249
|
|
Billings in excess of construction contract costs and estimated earnings
|
(9,320
|
)
|
|
(5,306
|
)
|
Net position
|
$
|
(8,987
|
)
|
|
$
|
(5,057
|
)
|
The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of June 30, 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Beginning backlog
|
|
$
|
235,642
|
|
|
$
|
160,871
|
|
|
$
|
242,622
|
|
|
$
|
165,863
|
|
New contracts/change orders
|
|
15,490
|
|
|
39,177
|
|
|
55,930
|
|
|
51,196
|
|
Work performed
|
|
(57,390
|
)
|
|
(21,416
|
)
|
|
(104,810
|
)
|
|
(38,427
|
)
|
Ending backlog
|
|
$
|
193,742
|
|
|
$
|
178,632
|
|
|
$
|
193,742
|
|
|
$
|
178,632
|
|
The Company expects to complete a majority of the uncompleted contracts in place as of June 30, 2020 during the next 12 to 18 months.
8. Indebtedness
Credit Facility
The Company has a senior credit facility that was amended and restated on October 3, 2019, which provides for a $355.0 million credit facility comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $205.0 million senior unsecured term loan facility (the "term loan facility" and, together with the revolving credit facility, the "credit facility"), with a syndicate of banks.
The credit facility includes an accordion feature that allows the total commitments to be further increased to $700.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit facility has a scheduled maturity date of January 24, 2024, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled maturity date of January 24, 2025.
The revolving credit facility bears interest at LIBOR (the London Inter-Bank Offered Rate) plus a margin ranging from 1.30% to 1.85% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.25% to 1.80%, in each case depending on the Company's total leverage. The Company is also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under the revolving credit facility, depending on the amount of borrowings under the credit facility.
As of June 30, 2020 and December 31, 2019, the outstanding balance on the revolving credit facility was $80.0 million and $110.0 million, respectively, and the outstanding balance on the term loan facility was $205.0 million, as of both of those dates. As of June 30, 2020, the effective interest rates on the revolving credit facility and the term loan facility were 1.76% and 1.71%, respectively. The Company may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty. On May 29, 2020, in conjunction with the sale of seven unencumbered operating properties, the Company repaid $61.9 million on the revolving credit facility. As a result of the sale and related reduction in our unencumbered base, borrowing capacity under the revolving credit facility was reduced to $100.0 million as of June 30, 2020 from $150.0 million.
The Operating Partnership is the borrower, and its obligations under the credit facility are guaranteed by the Company and certain of its subsidiaries that are not otherwise prohibited from providing such guaranty. The credit agreement contains customary representations and warranties and financial and other affirmative and negative covenants. The Company's ability to borrow under the credit facility is subject to ongoing compliance with a number of financial covenants, affirmative covenants, and other restrictions. The credit agreement includes customary events of default, in certain cases subject to customary cure periods. The occurrence of an event of default, if not cured within the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest, and all other amounts payable under the credit facility to be immediately due and payable.
The Company is currently in compliance with all covenants governing the credit facility.
Other 2020 Financing Activity
During the six months ended June 30, 2020, the Company borrowed $31.6 million under its existing construction loans to fund new development and construction.
In April 2020, the Company proactively obtained a waiver from the lender for the Premier Retail/Apartments loan wherein the Company does not have to meet the minimum debt service coverage requirement for the period ended June 30, 2020. The Company also proactively obtained a waiver from the lender for the 249 Central Park, Fountain Plaza Retail, and South Retail properties wherein the Company does not have to meet the minimum debt service coverage requirement for the period ended June 30, 2020 and the period ending December 31, 2020.
In June 2020, the Company exercised its option to purchase the remaining 21% ownership interest in 1405 Point in exchange for increased ground lease payments to be made over the approximately 42-year remaining lease term. The Company recorded a note payable of $6.1 million, which represents the present value of these payments. The ground lessor is an affiliate of our former joint venture partner.
As of June 30, 2020, the Company was in compliance with the applicable terms of all loan covenants after giving effect to the waivers granted.
9. Derivative Financial Instruments
The Company enters into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and other liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of interest rate derivatives in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the gain or loss is reported as a component of other comprehensive income (loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
As of June 30, 2020, the Company had the following LIBOR interest rate caps ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination Date
|
|
Expiration Date
|
|
Notional Amount
|
|
Strike Rate
|
|
Premium Paid
|
7/16/2018
|
|
8/1/2020
|
|
$
|
50,000
|
|
|
2.50
|
%
|
|
$
|
319
|
|
12/11/2018
|
|
1/1/2021
|
|
50,000
|
|
|
2.75
|
%
|
|
210
|
|
5/15/2019
|
|
6/1/2022
|
|
100,000
|
|
|
2.50
|
%
|
|
288
|
|
1/10/2020
|
|
2/1/2022
|
|
50,000
|
|
(a)
|
1.75
|
%
|
|
87
|
|
1/28/2020
|
|
2/1/2022
|
|
50,000
|
|
(a)
|
1.75
|
%
|
|
62
|
|
2/28/2020
|
|
3/1/2022
|
|
100,000
|
|
(a)
|
1.50
|
%
|
|
111
|
|
6/29/2020
|
|
7/1/2023
|
|
100,000
|
|
(a)
|
0.50
|
%
|
|
232
|
|
Total
|
|
|
|
$
|
500,000
|
|
|
|
|
$
|
1,309
|
|
________________________________________
(a) Designated as a cash flow hedge.
As of June 30, 2020, the Company held the following floating-to-fixed interest rate swaps ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Debt
|
|
Notional Amount
|
|
|
Index
|
|
Swap Fixed Rate
|
|
Debt effective rate
|
|
Effective Date
|
|
Expiration Date
|
Senior unsecured term loan
|
|
$
|
50,000
|
|
|
|
1-month LIBOR
|
|
2.78
|
%
|
|
4.33
|
%
|
|
5/1/2018
|
|
5/1/2023
|
John Hopkins Village
|
|
51,335
|
|
(a)
|
|
1-month LIBOR
|
|
2.94
|
%
|
|
4.19
|
%
|
|
8/7/2018
|
|
8/7/2025
|
Senior unsecured term loan
|
|
10,500
|
|
(a)
|
|
1-month LIBOR
|
|
3.02
|
%
|
|
4.57
|
%
|
|
10/12/2018
|
|
10/12/2023
|
249 Central Park Retail, South Retail, and Fountain Plaza Retail
|
|
34,114
|
|
(a)
|
|
1-month LIBOR
|
|
2.25
|
%
|
|
3.85
|
%
|
|
4/1/2019
|
|
8/10/2023
|
Senior unsecured term loan
|
|
50,000
|
|
(a)
|
|
1-month LIBOR
|
|
2.26
|
%
|
|
3.81
|
%
|
|
4/1/2019
|
|
10/26/2022
|
Thames Street Wharf
|
|
70,000
|
|
(a)
|
|
1-month LIBOR
|
|
0.51
|
%
|
|
1.81
|
%
|
|
3/26/2020
|
|
6/26/2024
|
Senior unsecured term loan
|
|
25,000
|
|
(a)
|
|
1-month LIBOR
|
|
0.50
|
%
|
|
2.05
|
%
|
|
4/1/2020
|
|
4/1/2024
|
Senior unsecured term loan
|
|
25,000
|
|
(a)
|
|
1-month LIBOR
|
|
0.50
|
%
|
|
2.05
|
%
|
|
4/1/2020
|
|
4/1/2024
|
Senior unsecured term loan
|
|
25,000
|
|
(a)
|
|
1-month LIBOR
|
|
0.55
|
%
|
|
2.10
|
%
|
|
4/1/2020
|
|
4/1/2024
|
Total
|
|
$
|
340,949
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(a) Designated as a cash flow hedge.
For the interest rate swaps designated as cash flow hedges, realized losses are reclassified out of accumulated other comprehensive loss to interest expense in the Condensed Consolidated Statements of Comprehensive Income due to payments made to the swap counterparty. During the next 12 months, the Company anticipates reclassifying approximately $4.3 million of net hedging losses from accumulated other comprehensive loss into earnings to offset the variability of the hedged items during this period.
The Company’s derivatives were comprised of the following as of June 30, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Fair Value
|
|
Notional
Amount
|
|
Fair Value
|
|
|
|
|
Asset
|
|
Liability
|
|
|
|
Asset
|
|
Liability
|
Derivatives not designated as accounting hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
50,000
|
|
|
$
|
—
|
|
|
$
|
(3,730
|
)
|
|
$
|
100,000
|
|
|
$
|
—
|
|
|
$
|
(1,992
|
)
|
Interest rate caps
|
|
200,000
|
|
|
21
|
|
|
—
|
|
|
250,000
|
|
|
25
|
|
|
—
|
|
Total derivatives not designated as accounting hedges
|
|
250,000
|
|
|
21
|
|
|
(3,730
|
)
|
|
350,000
|
|
|
25
|
|
|
(1,992
|
)
|
Derivatives designated as accounting hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
290,948
|
|
|
—
|
|
|
(14,082
|
)
|
|
146,642
|
|
|
—
|
|
|
(5,728
|
)
|
Interest rate caps
|
|
300,000
|
|
|
216
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total derivatives
|
|
$
|
840,948
|
|
|
$
|
237
|
|
|
$
|
(17,812
|
)
|
|
$
|
496,642
|
|
|
$
|
25
|
|
|
$
|
(7,720
|
)
|
The changes in the fair value of the Company’s derivatives during the three and six months ended June 30, 2020 and 2019 were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Interest rate swaps
|
|
$
|
(2,147
|
)
|
|
$
|
(4,549
|
)
|
|
$
|
(11,230
|
)
|
|
$
|
(6,201
|
)
|
Interest rate caps
|
|
(138
|
)
|
|
(843
|
)
|
|
(280
|
)
|
|
(1,657
|
)
|
Total change in fair value of interest rate derivatives
|
|
$
|
(2,285
|
)
|
|
$
|
(5,392
|
)
|
|
$
|
(11,510
|
)
|
|
$
|
(7,858
|
)
|
Comprehensive income statement presentation:
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate derivatives
|
|
$
|
(6
|
)
|
|
$
|
(1,933
|
)
|
|
$
|
(1,742
|
)
|
|
$
|
(3,396
|
)
|
Unrealized cash flow hedge gains losses
|
|
(2,279
|
)
|
|
(3,459
|
)
|
|
(9,768
|
)
|
|
(4,462
|
)
|
Total change in fair value of interest rate derivatives
|
|
$
|
(2,285
|
)
|
|
$
|
(5,392
|
)
|
|
$
|
(11,510
|
)
|
|
$
|
(7,858
|
)
|
10. Equity
Stockholders’ Equity
On February 26, 2018, the Company commenced an at-the-market continuous equity offering program (the "Prior ATM Program"), which was amended on August 6, 2019, through which the Company could, from time to time, issue and sell shares of its common stock having an aggregate offering price of up to $180.7 million. During the three months ended March 31, 2020, the Company issued and sold 92,577 shares of common stock at a weighted average price of $18.23 per share under the Prior ATM Program, receiving net proceeds, after offering costs and commissions, of $1.7 million.
On March 10, 2020, the Company commenced a new at-the-market continuous equity offering program (the "ATM Program") through which the Company may, from time to time, issue and sell shares of its common stock and shares of its 6.75% Series A Cumulative Redeemable Perpetual Preferred Stock (the "Series A Preferred Stock") having an aggregate offering price of up to $300.0 million, to or through its sales agents and, with respect to shares of its common stock, may enter into separate forward sales agreements to or through the forward purchaser. Upon commencing the ATM Program, the Company simultaneously terminated the Prior ATM Program. During the six months ended June 30, 2020, the Company issued and sold 486,727 shares of common stock at a weighted average price of $9.28 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $4.4 million. During the six months ended June 30, 2020, the Company issued and sold 3,830 shares of the Series A Preferred Stock at a weighted average price of $24.14 per share, receiving net proceeds, after offering costs and commissions, of $0.1 million. Shares having an aggregate offering price of $277.5 million remained unsold under the ATM Program as of August 5, 2020.
Noncontrolling Interests
As of June 30, 2020 and December 31, 2019, the Company held a 72.8% and 72.6% common interest in the Operating Partnership, respectively. As of June 30, 2020, the Company also held a preferred interest in the Operating Partnership in the form of preferred units with a liquidation preference of $63.3 million. The Company is the primary beneficiary of the Operating Partnership as it has the power to direct the activities of the Operating Partnership and the rights to absorb 72.8% of the net income of the Operating Partnership. As the primary beneficiary, the Company consolidates the financial position and results of operations of the Operating Partnership. Noncontrolling interests in the Operating Partnership represent units of limited partnership interest in the Operating Partnership not held by the Company. As of June 30, 2020, there were 21,272,962 Class A units of limited partnership interest in the Operating Partnership ("Class A Units") not held by the Company. The Company's financial position and results of operations are the same as those of the Operating Partnership.
Additionally, the Operating Partnership owns a majority interest in certain non-wholly-owned operating and development properties. The noncontrolling interest for investment entities of $0.6 million relates to the minority partners' interest in certain joint venture entities as of June 30, 2020, including Hoffler Place. The noncontrolling interest for consolidated real estate entities was $4.5 million as of December 31, 2019.
In June 2020, the Company exercised its option to purchase the remaining 21% ownership interest in 1405 Point in exchange for increased ground lease payments to be made to an affiliate of the Company's joint venture partner. The Company recorded a note payable of $6.1 million, which represents the present value of these payments over the approximately 42-year remaining lease term. The $2.4 million difference between the present value of these payments and the extinguishment of the existing noncontrolling interest balance was recorded as an adjustment to additional paid-in capital.
Dividends and Distributions
On January 2, 2020, the Company paid cash dividends of $11.8 million to common stockholders, and the Operating Partnership paid cash distributions of $4.5 million to holders of Class A Units.
On January 15, 2020, the Company paid cash dividends of $1.1 million to the holders of the Series A Preferred Stock.
On April 2, 2020, the Company paid cash dividends of $12.4 million to common stockholders, and the Operating Partnership paid cash distributions of $4.7 million to holders of Class A Units other than the Company.
On April 15, 2020, the Company paid cash dividends of $1.1 million to holders of shares of Series A Preferred Stock.
On April 30, 2020, the Company announced that its Board of Directors declared a cash dividend of $0.421875 per share on its Series A Preferred Stock payable in cash on July 15, 2020 to stockholders of record on July 1, 2020.
On April 30, 2020, the Company announced that its Board of Directors suspended quarterly cash dividends on common stock and cash distributions on Class A Units.
11. Stock-Based Compensation
The Company’s Amended and Restated 2013 Equity Incentive Plan (the "Equity Plan") permits the grant of restricted stock awards, stock options, stock appreciation rights, performance units, and other equity-based awards up to an aggregate of 1,700,000 shares of common stock. As of June 30, 2020, there were 738,006 shares available for issuance under the Equity Plan.
During the six months ended June 30, 2020, the Company granted an aggregate of 174,052 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $15.84 per share. Employee restricted stock awards generally vest over a period of two years: one-third immediately on the grant date and the remaining two-thirds in equal amounts on the first two anniversaries following the grant date, subject to continued service to the Company. Non-employee director restricted stock awards vest either immediately upon grant or over a period of one year, subject to continued service to the Company. Unvested restricted stock awards are entitled to receive dividends from their grant date.
During the six months ended June 30, 2020, the Company issued performance-based awards in the form of restricted stock units to certain employees. The performance period for these awards is three years, with a required two-year service period immediately following the expiration of the performance period in order to fully vest. The compensation expense and the effect on the Company’s weighted average diluted shares calculation were immaterial. During the six months ended June 30, 2020, 10,600 shares were issued with a grant date fair value of $18.08 per share due to the partial vesting of performance units awarded to certain employees in 2017.
During the three months ended June 30, 2020 and 2019, the Company recognized $0.5 million of stock-based compensation cost for each period. During the six months ended June 30, 2020 and 2019, the Company recognized $1.8 million and $1.5 million, respectively, of stock-based compensation cost. As of June 30, 2020, there were 168,511 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.7 million, which the Company expects to recognize over the next 21 months.
12. Fair Value of Financial Instruments
Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 — unobservable inputs
Except as disclosed below, the carrying amounts of the Company’s financial instruments approximate their fair values. Financial assets and liabilities whose fair values are measured on a recurring basis using Level 2 inputs consist of interest rate swaps and caps. The Company measures the fair values of these assets and liabilities based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.
Financial assets and liabilities whose fair values are not measured at fair value but for which the fair value is disclosed include the Company's notes receivable and indebtedness. The fair value is estimated by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity, credit characteristics, and other terms of the arrangements, which are Level 3 inputs under the fair value hierarchy.
In certain cases, the inputs used to estimate the fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Considerable judgment is used to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.
The carrying amounts and fair values of the Company’s financial instruments as of June 30, 2020 and December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Indebtedness, net
|
|
$
|
953,753
|
|
|
$
|
957,415
|
|
|
$
|
950,537
|
|
|
$
|
958,421
|
|
Notes receivable, net
|
|
182,245
|
|
|
178,488
|
|
|
159,371
|
|
|
159,371
|
|
Interest rate swap liabilities
|
|
17,812
|
|
|
17,812
|
|
|
7,720
|
|
|
7,720
|
|
Interest rate swap and cap assets
|
|
237
|
|
|
237
|
|
|
25
|
|
|
25
|
|
13. Related Party Transactions
The Company provides general contracting and real estate services to certain related party entities that are included in these condensed consolidated financial statements. Revenue from construction contracts with these entities for the three months ended June 30, 2020 was $11.0 million, and gross profit from such contracts was $0.4 million. Revenue from construction contracts with these entities for the six months ended June 30, 2020 was $19.5 million, and gross profit from such contracts was $0.7 million. There was no such revenue or gross profit for the three and six months ended June 30, 2019. As of June 30, 2020 and December 31, 2019, there was $9.8 million and $1.9 million, respectively, outstanding from related parties of the Company included in net construction receivables.
Real estate services fees from affiliated entities of the Company were not material for any of the three and six months ended June 30, 2020 and 2019. In addition, affiliated entities also reimburse the Company for monthly maintenance and facilities management services provided to the properties. Cost reimbursements earned by the Company from affiliated entities were not material for any of the three and six months ended June 30, 2020, and 2019.
The general contracting services described above include contracts with an aggregate price of $80.4 million with the developer of a mixed-use project, including an apartment building, retail space, and a parking garage to be located in Virginia Beach, Virginia. The developer is owned in part by certain executives of the Company, not including the Chief Executive Officer and Chief Financial Officer. These contracts were executed in 2019 and are projected to result in aggregate gross profit of $3.1 million to the Company, representing a gross profit margin of 4.0%. As part of these contracts and per the requirements of the lender for this project, the Company issued a letter of credit for $9.5 million to secure certain performances of the Company's subsidiary construction company under the contracts, which remains outstanding as of June 30, 2020.
The Operating Partnership entered into tax protection agreements that indemnify certain directors and executive officers of the Company from their tax liabilities resulting from the potential future sale of certain of the Company’s properties within seven (or, in a limited number of cases, ten) years of the completion of the Company’s initial public offering and formation transactions completed on May 13, 2013.
14. Commitments and Contingencies
Legal Proceedings
The Company is from time to time involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.
The Company currently is a party to various legal proceedings, none of which management expects will have a material adverse effect on the Company’s financial position, results of operations, or liquidity. Management accrues a liability for litigation if an unfavorable outcome is determined to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined to be probable and a range of loss can be reasonably estimated, management accrues the best estimate within the range; however, if no amount within the range is a better estimate than any other, the minimum amount within the range is accrued. Legal fees related to litigation are expensed as incurred. Management does not believe
that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on the Company’s financial position or results of operations; however, litigation is subject to inherent uncertainties.
Under the Company’s leases, tenants are typically obligated to indemnify the Company from and against all liabilities, costs, and expenses imposed upon or asserted against it as owner of the properties due to certain matters relating to the operation of the properties by the tenant.
Guarantees
In connection with the Company's mezzanine lending activities, the Company has made guarantees to pay portions of certain senior loans of third parties associated with the development projects. The following table summarizes the guarantees made by the Company as of June 30, 2020 (in thousands):
|
|
|
|
|
|
Development project
|
|
Payment guarantee amount
|
The Residences at Annapolis Junction
|
|
$
|
8,300
|
|
Delray Plaza
|
|
5,180
|
|
Nexton Square
|
|
12,600
|
|
Interlock Commercial
|
|
34,300
|
|
Interlock-Fletcher Row (1)
|
|
2,345
|
|
Total
|
|
$
|
62,725
|
|
________________________________________
(1) There were no amounts drawn for this loan as of June 30, 2020.
Commitments
The Company has a bonding line of credit for its general contracting construction business and is contingently liable under performance and payment bonds, bonds for cancellation of mechanics liens and defect bonds. Such bonds collectively totaled $3.3 million and $4.3 million as of June 30, 2020 and December 31, 2019, respectively. In addition, as of June 30, 2020, the Company has outstanding a letter of credit for $9.5 million to secure certain performances of the Company's subsidiary construction company under a related party project.
The Company has entered into standby letters of credit using the available capacity under the credit facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction contracts. Letters of credit generally are available for draw down in the event the Company does not perform.
15. Subsequent Events
The Company has evaluated subsequent events through the date on which this Form 10-Q was filed, the date on which these financial statements were issued, and identified the items below for discussion.
Indebtedness
In July 2020, the Company borrowed $2.9 million on its construction loans to fund development activities.
In July 2020, the Company decreased its borrowings under the revolving credit facility by $32.0 million, bringing the outstanding balance down to $48.0 million.
Equity
On July 1, 2020, due to the holders of Class A Units tendering an aggregate of 756,697 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption requests through the issuance of an equal number of shares of common stock.
In connection with the ATM Program, on July 2, 2020, the Company filed, with the MSDAT, Articles Supplementary to the Articles of Amendment and Restatement of the Company, designating an additional 3,450,000 shares of the Company’s authorized preferred stock as shares of Series A Preferred Stock, resulting in a total of 6,380,000 shares classified as Series A Preferred Stock. The Articles Supplementary became effective on July 2, 2020.
On July 15, 2020, the Company paid cash dividends of $1.2 million to holders of shares of Series A Preferred Stock.
On July 30, 2020, the Company announced that its Board of Directors declared a cash dividend of $0.421875 per share of Series A Preferred Stock for the third quarter of 2020. The dividend will be payable in cash on October 15, 2020 to stockholders of record on October 1, 2020.
On July 30, 2020, the Company announced that its Board of Directors declared a cash dividend of $0.11 per common share and Class A Unit for the third quarter of 2020. The dividend will be payable in cash on October 8, 2020 to stockholders and Class A unitholders of record on September 30, 2020.
In July 2020, the Company sold an aggregate of 166,630 shares of common stock at a weighted average price of $10.16 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $1.7 million.
In July 2020, the Company sold an aggregate of 709,588 shares of Series A Preferred Stock at a weighted average price of $22.87 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $16.0 million.